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Why I believe the Vodafone share price and 9% dividend yield are incredible value

Imagine a company whose shares have fallen 37% since the start of the year, over 50% in less than five years and are now trading at the same level as almost a decade ago. You might think of a company in a cyclical industry that’s gone into a downturn, or a company in a dying industry, or perhaps a company that’s simply issued a string of profit warnings. None of these are true of FTSE 100 telecoms giant Vodafone (LSE: VOD) but its shares have fallen precisely as described above.

I’ll come back to why I believe Vodafone’s current share price and 9% dividend yield are incredible value, but first I want to tell you about tech firm Tracsis (LSE: TRCS). This £170m-cap company, which released its annual results today, is a leading provider of software and services for the traffic data and transportation industry.

Growth on track

I lauded Tracsis when I covered its results this time last year. I’m happy to do so again, after what chief executive John McArthur described this morning as,“another great year for Tracsis on multiple fronts.” The company focuses on markets that generally have “high barriers to entry, with contracts that are sold on a recurring/repeat basis, and to a retained customer base that is predominantly blue-chip in nature.” The strategy continues to deliver consistent growth.

This year, group revenue increased 16% to £40m, with a strong performance from both its Rail Technology & Services division (up 19% to £19m) and Traffic & Data Services division (up 13% to £21m). Adjusted basic earnings per share (EPS) increased 9.4% to 26.34p from 24.08p last year and cash on the balance sheet (the company has no debt) swelled to £22.3m from £15.4m. A year ago, the share price was 522.5p and the trailing price-to-earnings (P/E) ratio was 21.7. However, with cash representing 55p a share, the cash-adjusted P/E was a more palatable 19.4.

Today, the share price is 590p, the trailing P/E is 22.4 and, with cash on the balance sheet now representing 79p a share, the cash-adjusted P/E is 19.4. This is the same as last year — as is my conclusion: the shares look very buyable to me.

Phoney dividend worries?

One thing investors don’t get from Tracsis is a high dividend yield. It’s just 0.3% on this year’s payout of 1.6p — although it’s rising fast (up 14% from last year) and is covered a massive 16.5 times by earnings. In contrast, Vodafone’s generous dividend has always been a big attraction, and at the current depressed share price of 147p, the yield on offer is higher than ever. Its last payout of 15.07 euro cents (13.2p at current exchange rates) gives a running yield of 9%.

Now, the payout wasn’t covered by earnings of 11.59 euro cents (10.1p). However, it was covered by free cash flow. Nevertheless, with Vodafone planning to increase spending to acquire spectrum over the next couple of years and also having agreed to buy €18.4bn of assets from Liberty Global (expected to complete mid-2019), the market evidently fears for the dividend, even though the consensus among City analysts is positive. The way I see it, if Vodafone can get over the hump of the upcoming expenditure on higher borrowings, while maintaining the dividend, the returns for investors could be spectacular. And as I wouldn’t see a reduced dividend as the end of the world, I rate the stock a ‘buy’.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Tracsis. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.